Julian Assange Just Called. To Talk About the Pandemic’s Effect on Capitalism & Politics!

Yves here. This sort of high-level take, here on where capitalism is going, is a Varoufakis strength. And the fact that Assange would want to have this sort of conversation says, remarkably, that he has not been broken despite the concerted efforts to crush him.

By Yanis Varoufakis. Originally published at his website

Julian called me a little earlier on, at 14.22 London time to be precise. From Belmarsh High Security Prison of course. This is not the first time but, as you can imagine, every time I hear his voice I feel honoured and moved that he should dial my number when he has such few and far between opportunities to place calls.

“I want a perspective on world developments out there – I have none in here”, he said. Which, of course, placed a considerable burden on me to articulate thoughts on capitalism’s fate during this pandemic and the repercussions of it all on politics, geopolitics etc. The knowledge that Her Majesty’s Prison authorities would discontinue our discussion at any moment made the task harder.
In a feeble attempt to paint a picture for him on as broad a canvass as possible, I shared with Julian my main thought of the last weeks:

Never before has the world of money (i.e. the money markets, that include the share markets) been so decoupled from the world of real people, real stuff – from the real economy.

We watch in awe as GDP, personal incomes, wages, company revenues, businesses small and large, collapse while the stock market is staying relatively unscathed. The other day, Hertz declared bankruptcy. When a company does this, its share price goes to zero. Not now. In fact, Hertz is about to issue $1 billion worth of new shares. Why would anyone buy shares of an officially bankrupt company? The answer is: Because central banks print mountain ranges of money and give it for almost free to financiers to buy any piece of junk floating around the stock exchange.

“Complete zombification of the corporations”, is how I put it to Julian. Julian commented that this proves that governments and central banks can keep corporations afloat even when they sell next to nothing at the marketplace. I agreed. But, I also pointed out a major conundrum that capitalism faces for the first time. It is this:

Central bank money printing keeps asset prices very high while the price of ‘stuff’ and wages fall. This disconnect can go on growing. But, when Hertz, British Airways etc. can survive in this manner, they have no reason not to fire half the workforce and to cut the wages of the other half. This creates more deflation/depression in the real economy. Which means that the Central Banks must print more and more to keep asset and share prices high. At some point, the masses out there will rebel and governments will be under pressure to divert some income to them. But this will deflate asset prices. At that point, because these assets are used by corporations as collateral for all the loans they take out to stay afloat, they will lose access to liquidity. A sequence of corporate failures will commence under circumstances of stagnation. “I don’t think capitalism can easily survive, at least not without huge social and geopolitical conflicts, this conundrum”, was my conclusion.

Julian thought about this for a moment and asked me: “How important is consumption to capitalism? What percentage of GDP is at stake if consumption does not recover? Do the corporations need workers or customers?” I answered that it was high enough to make this conundrum real. Yes, Central Banks and robots can keep the corporations going without customers or workers. But, robots cannot buy the stuff they produce. So, this is not a stable equilibrium. The losses in people’s incomes will accelerate, thus generating pivotal discontent.

Julian then said something along the lines of: That will benefit Trump who knows how to feed off the anger of the multitudes toward the educated, upper middle-class elites. I agreed, saying that DiEM25 has been warning since 2016 that socialism for the oligarchy and austerity for the many, in the end, feeds the racist ultra-right. That we are experiencing again what happened in the 1920s in Italy with the rise of Mussolini.

Julian agreed entirely and said: Yes, like then, there is an alliance forming between rich people and the discontented working class. He then added that most of the prisoners and the prison officers in Belmarsh support… Trump. At that point the connection was cut off.

Our conversation lasted 9’47’’. It was more substantive, and of course moving, than any conversation I have had in a while.

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59 comments

  1. Ignacio

    These days I am contacting many SMEs which are not supported by these central bank programs and I am seeing in some cases desperation with the situation. The short-sigthedness of such policies is appalling. It is as if some guys live in a word where only the big corps exist.

    Reply
    1. Conrad

      Other than the occasional chic boutique or trendy restaurant I’d wager that the high ups in the central banks and their social circles do indeed live in a world where only big corps (and big gov) exist.

      Reply
  2. CBBB

    It does seem, however, that consumption is recovering quickly and that a lot of takes about this being a Depression and the recovery is going to be very slow appear to have been wrong. Seems like the stock market is not so decoupled from reality — it is predicting a strong recovery from the lockdown which appears to be underway.

    Reply
    1. Yves Smith Post author

      Huh? The Atlanta Fed GDPNow predicts a -48.5% second quarter (it is to be updated today). If you think we are going to “recover” all that damage in anything less than years, you are smoking something strong. 1/4 of US restaurants are expected to fail. Lucrative business travel is not coming back any time soon. Airline travel is very depressed and will remain that way. Hubert Horan pointed out that the Big 4 US airlines will lose $65 billion this year on top of their $65 billion bailout. Hotels are bleeding. 40% if not more of commercial leases are not being paid, including by tenants with money. The bloodletting at the municipal and state level has only started. More firings will occur as PPP commitments to keep staff on expire in June and July.

      Some pickup as lockdowns were ended was inevitable. But that does not mean a recovery in the way you are using the word.

      Reply
      1. Upstater

        Unpaid commercial rents in the US were “nearly half” as quoted in an FT editorial yesterday. That will become a huge number of defaults. And shortfalls for pension funds.

        Meanwhile sales tax revenue is down 40% and local county government gave Amazon a $75M tax break to build a monster warehouse. Not to worry, homeowners and small business will pick up the tab.

        Reply
      2. jerry

        Right, but look at the retail sales number that just came out. Tons of money is being poured into the private sector every week via unemployment (with the $600 federal bonus) as well as reduced revenue, as well as the 1200$ stimulus check, which may be followed by another soon. There’s also the possibility of the benefits being extended, given that its an election year and all.

        Yes, many restaurants and small businesses will go under, but there is a lot of money that is about to be spent into the economy, which will reignite the engine as more and more of the economy opens up from corona. From a sectoral balance perspective (which is all aggregate demand is based off of really), we are in the midst of a massive stimulus.

        Reply
          1. John k

            ‘Only”?
            Consumer spending is 68% of the economy. If this is halved it means a 34% declinine in gdp. Worse than the depression. And what then re the 30% balance? Can’t imagine much business spending. State and local already cutting staff. Only feds in maintenance mode.
            Feds are supporting incomes, but for how long? This mystery prevents the money received from being spent, not even for rent… if you’re gonna be evicted best have some cash.
            Grocery stores and Netflix… who else?

            Reply
          2. jerry

            most people who lost their jobs were lower income, retail/restaurant jobs, who are making way more on unemployment than they did before.. hence the proposals being considered to incentivize people to go back to work. Not sure where you pulled the 50% number from.

            Reply
            1. Lil’D

              I can’t believe anyone is “making way more money on unemployment”. Top end of unemployment comp is about equivalent to $15/hr. What appealing wage exists such that this is “way more”?

              Reply
              1. Steve H.

                A good friend who is a certified massage therapist specifically told me this. And that he had no intention of going back to work if he continued to get the benefit.

                Which, again, is not a bad policy if you’re trying to stop a pandemic…

                Reply
      3. ChrisFromGeorgia

        I think the original poster fell for the trap of believing government statistics which are rather misleading at best. For example, credit card data shows a nice bounce but doesn’t take into account the likelihood that many transactions that would have been made in cash switched to credit. Similarly it doesn’t look like many Americans understand basic math – a 16% plunge in retail sales one month followed by a 16% gain the next does NOT get you back to even.

        lets say that in March retail sales were at an index level of 100:

        100 x .16 = 16

        April = 84

        84 x .16 = 13.44 + 84 = 97.44 (Mays level not back to 100)

        Reply
      4. Olivier

        Yves, OTOH there are the amazing figured just disclosed by cruise operators: booking for 2021 and 2022 simply splendid, as if COVID-19 never happened. Granted these are bookings a year or more away but because of the downpayment (or non-refund, in the case of a transferred booking) this is still real money for the companies. See the recent WolfStreet post for details. And everything you said in your own post about fear of density, perception etc applies in spades to cruises.

        I think we should not rule out the possibility of some surprises.

        Reply
    2. Oh

      People believe that the stock market is predicting a strong recovery forget that several trillion $ have been given as “loans” to the big corps who are busy buying back their own stock. This doesn’t appear to be a recovery based on any fundamentals.

      Reply
      1. Michael

        Not true.
        If you borrow from the Fed you are prohibited from repurchasing shares for 12 months after you pay the money back.
        Big tech companies like Apple are still buying back stock.
        Banks suspended all buybacks.
        Corporate profits are expected to plunge in Q2 as much as 40%.

        Reply
        1. Timh

          Not prohibited from layoffs, let alone showing that they are necessary. That pushes down costs, raises net profit.

          Reply
    3. km

      If all that were necessary to fix any economic problem is to throw more free money at insolvent businesses (a sort of perverse inversion of MMT), then the Soviet system should have performed better.

      Lord knows there are plenty of things wrong with capitalism as it is practiced, but at least it let failing enterprises fail.

      Reply
      1. Pat

        Better continue to use that past tense. What we have now are small business failures, failures of businesses zombified by private equity who have stripped their assets, and probable failure of some middle sized businesses that serviced the needs of the zombies and small businesses. Otherwise there are huge cuts for workers either in wages and benefits or outright job losses from more outsourcing and downsizing, while the C suite and major investors come out whole or much better.

        Reply
  3. CBBB

    Although I agree that austerity and economic stagnation helps the far right, I think when it comes to 2020 specifically Trump is a dead-letter now. A few months ago I felt it was a toss-up or he had the advantage but after COVID-19 and the protests I think his response has made him look weak and out-of-his-depth which is a very bad look for him and I don’t think he will be able to recover his image. Therefore I find Trump re-election to be highly unlikely.

    Reply
    1. Yves Smith Post author

      In a surprising number of primaries, Trump has gotten more votes in his uncontested primary than not just the Dem winner, but often all the Dem candidates combined. If the Dems go law and order by having Kamala Harris as Biden’s VP, that is a huge poke in the eye to the blacks upset about police brutality. That will depress black turnout.

      Trump is awful but his base will turn out, while Biden seems to be doing his best to overplay his hand by pissing off Sanders and black voters.

      Reply
      1. Off The Street

        One interpretation is that there are many people who have become angry enough at The System to turn out, rally and even vote. For that complacency, and prior trust in some order to the domestic situation, to be overcome should be of grave concern to the DNC. They are viewed, rightly or wrongly, as the architects and directors of said System, whether in cities like Chicago or across the country.

        Therein lies great opportunity for Sanders to find common ground with those previously disaffected voters of all stripes. Doing so would mean more pragmatism, in a more positive than normative sense, than politics, so a tall order. But what does he have to lose?

        Reply
        1. Edward

          I am not that surprised. Biden is an artificial candidate who I doubt genuinely won the primary. Some establishment entity which I will refer to as the “DNC” manipulated the primaries in favor of Biden and against Sanders. The elections may have been as fraudulent as the polls, which claimed Clinton in 2016 and Biden in 2020 were in the lead. Voters find themselves faced with two candidates they dislike. What will they do? I think the public has a general sense that political parties are scamming them. The Democratic party is really like two parties, the “outs” and the “ins”, that are at war with each other. They are forced into a single party by America’s system of political monopolies; third parties are next to impossible in this system, although given the dissatisfaction they may become possible.

          Reply
          1. Aumua

            Imagine Sanders vs. Trump right now. How exciting would that be! What is happening instead is just… it’s beyond depressing.

            Reply
            1. Dirk77

              +1. You’ve said it all. Except the depressing part. Sanders was a good sport to run again, and that helped a lot. I underestimated the power of his hammering away again at his vision of society. This election may be disaster, but after that who knows. Perhaps many useful social experiments to come.

              Reply
            2. Edward

              We seem to be headed for a crash. That is how the political monopoly will crack– the hard way when everything falls apart. Biden doesn’t seem to be rising to the occasion of his presidential run. His efforts are curiously flaccid. At what point do people coalesce around a third party? In some ways insurgents like Sanders and AOC are a third party.

              Reply
      2. DJG

        Yves Smith: Your observation brings to my mind Frum’s law.

        The Republicans fear their base. The Democrats hate their base.

        For years, the Republicans have used the Southern Strategy, which is to keep resentment at a low boil, with occasional expressions at surprise when rightwing violence (like the current police riots) breaks out. But rightwing violence is always salubrious and deserved, as we all have been taught in fear-ridden U S of A. Meanwhile, the Democrats engage in outright contempt. Currently, they are waiting for the crisis to pass so that they can get back to passing FISA renewal and making Trump look like a civil libertarian.

        Reply
        1. Carolinian

          The Republicans fear their base. The Democrats hate their base.

          Kind of sums it up. I do think the elites, as always, are out of touch. Just reading that Sunday the NYT had an editorial favoring doing away with the police.

          https://www.nytimes.com/2020/06/12/opinion/sunday/floyd-abolish-defund-police.html

          While some polls show majority public support for the protests, here’s betting that “law and order” may very well win the day for Trump if the Dem platform is to replace Trumpian chaos with even greater chaos. That’s why I believe the current protests are more of a play acting revolution. When the chips are down middle class America will go for safety. The notion that this is some kind of “color revolution” is overblown.

          Reply
          1. Aumua

            The absolute ambiguity around defunding/abolishing… what do those words mean here? are we reducing/transferring police funds elsewhere or just cutting off police funding completely? Wildly different opinions and plans, no clear picture of how any of it would look in practical terms… no es bueno.

            Whether or not it sways anyone on the fence, the right wing radio demagogues are using that ambiguity to great effect in energizing their base to vote for Trump or else face the literal destruction of America.

            Reply
  4. bold'un

    “Central bank money printing keeps asset prices very high while the price of ‘stuff’ and wages fall” Hmm. You would think that if say an airline or a restaurant survives to restart but with fewer customers then the price per customer needs to go up to cover fixed costs. Meanwhile rentiers are actually suffering from cuts in dividends, rents and interest rates. In the 1930s almost everyone became poorer in the absolute, owners and employees alike.
    The only way to square the circle will be a sudden inflation: the political issue here is that government employees and pensioners who are indexed do so much better than the private sector.

    Reply
    1. Clive

      No. Have you not been observing Japan for the last 30 years? Asset prices took at tumble in the 1990’s but that merely reduced “stratospheric” valuations to “bad nosebleed inducing” levels. Don’t believe me? $400,000 for a studio and $600,000 for a one-bed in Tokyo (similar to other tier-1 cities). And these make Manhattan places look spacious. For anything which would satisfy western standards of accommodation (even in, say, space-pinched London housing square footage measurements) you’re looking at $1M US+++. This Bubble-era fixer-upper in smart Denenchofu is about $5M and needs $250k spending on it to drag it out of the late 90’s.

      And they’ve not budged since, despite bouts of deflation. Yes, that’s deflation. Consumer prices haven’t risen in 30 years. Japan’s successive governments have been desperately trying to engineer inflation. The more they try to shift the dial by scaring people with liquidity, the more people cut back. Same with stocks. It’s reached a sort-of equilibrium now with the government effectively owning majorities of the “private sector” markets. It’s basically run out of things to buy. Same bad outcome for labour, though. Retail prices may have have fallen, but wage rates fall faster, in real terms.

      Varoufakis has this right, no doubt he’s studied Japan in depth to arrive at his conclusions.

      Reply
      1. Redlife2017

        Yes, Japan has bouts of what they call “Deflay” (and yes, the “l” is pronouced like a combo “r” / “l”). I was a member of a Japanese buddhist temple that had mostly small and medium size business owners (and professional class people like doctors) as members. In the 2000s, I remember speaking with the wife of the chair of a pharmacutical company and she noted that she would mend her sweaters and other clothing. This is a woman who knew where to get the best kaiseki in Kyoto (and took my mom & I there) and yet was mending her clothing. A similar story (also in the 2000s) with the wife of the owner of a lock building company (i.e. locks on rivers). These are people that are able to have private dining at restaurants! When these kind of people are mending clothes and reducing waste in order to not spend money, uhhhh…what will normal people do? Spend nothing. Absolutely nothing.

        I’d like to note that people in the West look at what happened in Japan and think that’s what will happen here. What kept Japan from imploding was their culture and society. Enough upper class people over there understand that all people have an obligation to wider society. The lock building owner once told me a story about how East Germans came over in the 1970s to Japan and at the end of their trip they basically said – “This is a REAL socialist country.” And the businessman who told me this story was proud of that. I mean REALLY proud. You will not find that attitude with enough people in the West who own capital. And that is going to be the problem. We’re not going to get social stagnation with some fringe right-wingers occasionally causing problems and where most people are OK (or enough are OK and the problems can be swept under the carpet). We’re going to get full on, grind down on everyone below the top 1%. The rich won’t mend their clothes…

        Reply
  5. John

    For all the austerity buffs who counting their asset gains, if it is a grand idea to ‘print money’ to shore up the financial markets, why is it unthinkable to do the same for Social Security and Medicare?

    Reply
    1. Shonde

      Per David Sirota, “Since 2008, we spent somewhere between $20-35 trillion on corporate bailouts — that’s the allegedly “unaffordable” amount that could pay for Medicare for All in the same time period.”

      https://sirota.substack.com/p/they-had-the-medicare-for-all-money?token=eyJ1c2VyX2lkIjoyNzY1ODUwLCJwb3N0X2lkIjo1NTkyMjksIl8iOiJSTlgweiIsImlhdCI6MTU5MjMzODAwNywiZXhwIjoxNTkyMzQxNjA3LCJpc3MiOiJwdWItMzc3NzgiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.RuJB8J4Sfb02auoU8LYamnlEASp4MmZ5Ca6VUPX0M0M

      Reply
    2. Anarcissie

      When funny money is inflated and given to the rich, it mostly disappears into numbers associated with them in computer-maintained abstract realities. If the funny money were given to poor people, then they would spend it, causing inflation, which would give the game away. Hence the funny money must be kept away from poor people.

      Reply
  6. The Rev Kev

    Good to see that Julian is still sharp enough to pick out the important part of the economy – consumption. No flies on that boy. And I noticed that the conversation was allowed to go along for a long time talking about the economy as, after all, those guards listening knew that that effected them. Maybe even their pensions. But as soon as they got onto politics – particulars theirs – the whole thing got cut off.

    Reply
  7. Edward

    I think economics is a system which tricks people into giving their labor in return for something. At the national level it seems fairly artificial. We have seen the “haves” testing how much they can get away with in terms of bailouts, money printing, sanctions, misinformation, global warming, and so on. So far they have gotten away with their testing, but now they are pushing matters even further…

    Reply
    1. ex-PFC Chuck

      Having been an utter economic naif when I started following this blog 10+ years ago, I now realize that the neoclassical school of Economics is nothing more than an info op run by and on behalf of the ultra wealthy and their minions.

      Reply
  8. Susan the other

    The comparison between 1920s Italy and US today is off by a century of social transformation. Mussolini was a fatuous incompetent. Trump is constantly asking the Fed to lower interest rates; he’s glad to have Congress sending out those virtually pointless checks. He literally does not know what to do, but he abhors war and I doubt he will march us off to one. He’s out of his depth but so is Biden. And Biden is far more dangerous. Today the power behind Mussolini and Hitler, European and American industrialists-fascists, is at best conflicted because of over-population and environmental concerns. I think all the war-mongering at this point is theater except for the drive to control oil. So is the China-America trade war. And I don’t see how we do WW3 in the midst of this crisis. This isn’t a political crisis so much as it is an existential crisis. The classic Marxist remedy, to give everyone a job manufacturing stuff, won’t work. If we gave everyone an environmental job that would work to keep money circulating – but our old ways of consuming have got to go. So the old standby of socialism based on materialism for all won’t fly anymore. Assange’s question, How important is consumption to capitalism? is really the wrong question – the better question is, How important is capitalism to consumption? And what level of consumption can the planet sustain?

    Reply
    1. Rod

      Your observation, imo, is acute:
      The classic Marxist remedy, to give everyone a job manufacturing stuff, won’t work. If we gave everyone an environmental job that would work to keep money circulating – but our old ways of consuming have got to go. So the old standby of socialism based on materialism for all won’t fly anymore.

      and NC gives us this to think on:

      Coronavirus Recovery: Why Local Markets are Key to Reviving Our Locked Down Town Centres –

      Time to imagine stuff–like putting castles in clouds and building foundations up to meet them–

      What could happen if we stopped/limited drastically the production of new, gas/diesel Automobiles and instead turned that Industry into a Repair and Rebuild Industry for about 5 years. Mine in our existing scrapyards/Showrooms into Repair Parlors/Coders into Diagnosticians and Mechanics…
      Something along those lines.–Maybe Community Centers with a Auto repair plaza along the edges of the basketball courts and Social Service Agencies with Transportation Consultants–maybe Multi Owners or Communal Users on Consignment.

      A Sharing/Reuse Economy could fill many gaps, I think.
      Just some thoughts I have while weeding the Garden.

      Reply
      1. Rod

        This from the NC post I refered to:

        Importantly, the COVID-19 crisis is an opportunity to promote more socially and environmentally sustainable and just local economies. Big supermarkets, by contrast, rely on unsustainable long global supply chains and prioritise profit for shareholders rather than local needs and livelihoods. There is now an opportunity to reposition markets not only as key pieces in the retail landscape but as community hubs for more inclusive economies.

        Reply
        1. Fíréan

          The Great Re-Set ?

          Also requires a culling of the masses and involuntary induced infertility ( the latter already started in an other than america continent, through vacine intended for other purposes)

          Reply
    2. templar555510

      This is THE existential crisis of our lifetimes and by definition it is messy beyond imagining and nothing can be assumed no matter what happened yesterday or a hundred years ago. To project the past into the future is fatuous . Neoliberalism has taken capitalism to a place where it can only implode because it can no longer adapt to meet the needs of the many – the examples are there in front of our eyes – private equity, hedge funds, Uber . They will all crumble to dust . Trump stands for nothing. Bolton’s book’s great revelation that Trump was only concerned with his re-election not the country – seriously that’s a revelation . All this ‘ analysis ‘ is no more than the need to fill the ever expanding universe of the internet .

      Reply
    3. Alex Cox

      The old spook Robert Gates made the same point yesterday: unlike his predecessors, Trump hasn’t started any new wars. Surprising though it may be to liberals, that actually means something to his base.

      Reply
  9. shinola

    This: “…Hertz is about to issue $1 billion worth of new shares.”

    WTF?!?

    I thought this must be some sort of misprint or misunderstanding so I did a quick search. Apparently, it’s true (although one report says it’s only $500 mil.)

    The inmates are now running the asylum.

    Reply
    1. deplorado

      If Hertz emerges from bankruptcy without debt and sheds whatever obligations they now have, and have at least a path to profitability after the crisis, why not ask the public to give them capital?

      Im not a financial person and I dont know the Hertz particulars but it makes sense to me from that perspective.

      But yeah it may be happening a bit too quickly – and the stock market is a scheme to extract value from companies (as Lazonick has shown – I think we need him to put out a paper on the current Covid shaped market!), so the whole thing may be a scheme.

      As the saying goes, he who eats the pie is not foolish — foolish is the one who lets him.

      Reply
  10. john bougearel

    I do not think Yanis is aware of the implications that the Federal Reserve did away with the Reserve Requirement Ratio RRR on March 15 2020, effective March 26 2020 and is now buying junk bonds.

    So, even if the corporate assets that corporations use as collateral deflate, as Yanis asserts, they will no longer automatically lose access to liquidity that Yanis believes they will.

    Lowering the RRR basically makes it easier for banks to lend, says Bill Holter. Now with a zero reserve requirement “the reverse of that is it could [theoretically] create unlimited lending….The reverse of zero is infinitiy. So what they are trying to do is they are trying to reflate again….things can go wrong. You could have banks lending to any type of project. It opens the door to more fraudulent lending fraudulent borrowing. The bank could be busted and it still won’t matter because they can still lend…That is what a zero requirement says. And go one step further and look what the Fed’s doing. The Fed is buying junk bonds.”

    Thus corporations can be complete zombies, and theoretically issue junk bonds to infinity on next to nothing in assets for collateral.

    This petri dish of “liquidity to infinity” is the perfect culture to completely bring down the fatally flawed global financial system as it imperfectly stands today.

    Reply
    1. deplorado

      So this invokes in me the thought that the effect of these RRR changes in the worst case may redound to what happened in Russia and some Eastern European countries in the 90ies — a deluge of uncontrolled credit giveaway to cronies and gov’t connected entities, which devalued their currencies which crushed labor and made asset prices (from homes to new and old cars to hand tools) skyrocket out of reach for 95% of the population and ushered severe stagflation. No one likes to remember the 90ies in those countries. It made the Great Depression look like a good deal.

      Could this happen in the US? There are parallels. I hope not.

      Reply
      1. john bougearel

        While credit and debt creation can extend to infinity where zero reserves are required, they will also invoke a yield curve control YCC so that both short and long term real rates are negative.

        This will have inflationary consequences down the road. But I think you will see the Fed act with restraint before doing so, as the optimal time to invoke YCC and inflate reflate assets is when the stock market has bottomed out – say sometime in 2022. There are probably several months if not several quarter until the current deflationary cycle plays itself out.

        Then, the negative real rates will have a chance to create measurable Consumer Price Inflation, perhaps like Russia in the 1990s or perhaps like the US in the 1940s and 1950s after the Fed officially adopted a negative real rate policy in 1942.

        Consumer price inflation didn’t peak until 1947,and price inflation reached 20%. At the same time, negative long and short term real rates plunged nearly 20%.

        The good news for US investors about the 1940s negative real rates is that the stock market took off in 1942 following the Dec 1941 Pearl Harbor attack and the victorious Battle of the Midway in June 1942. The stock market more than doubled by 1946. And by the time the Fed quit the negative real rate policies in 1952, the stock market had already tripled.

        Reply
      2. Edward

        The early history of this country was plagued with bank failures. The United States gradually developed a functional banking system. We seem to be demolishing that system. In a way, we are enjoying the fruits of the non-reforms after the 2008 crash. The FIRE sector and their politicians seem to have concluded they can continue to misbehave and enrich themselves.

        Reply
    2. chuck roast

      If Yanis had not gotten cut off he may have continued with his analysis. Without putting words in his mouth, the deflation he mentions will be followed by a great inflation as manufacturing gets on-shored and the Fed and Congress are forced to share the printing press by the great unwashed. This is what I got from Roubini’s interview the other day. The people that think it through figure deflation followed by inflation. Of course the Japanese couldn’t make it happen with all their bells and whistles, so there is that.

      Reply
      1. Dirk77

        There was an article in ZeroHedge (yes, I know) last week that showed data for consumer spending as a function of interest rate. It was a maximum at 4%. So in that sense, holding interest rates low, such as were in Japan, were counterproductive.

        Reply
      2. Yves Smith Post author

        Sorry, manufacturing cannot be readily onshored, if ever.

        The US no longer has the factory floor and supervisory managers who can run manufacturing. These are essential skills we have ceded. And we don’t have senior managers who know their asses from their elbows either. MBAs are famously arrogant about their ignorance.

        And that’s before we get to the horrible state of US education and our lack of minimally numerate laborers that can do factory work that now requires it to some degree due to the much heavier use of equipment and automation.

        Reply
        1. skippy

          You can add just about any skill labour to that observation, what industry does not drive to cheapen, market dynamics ensure skills and standards are lowered.

          The final blow is the quality of the new younger entrants and the PPP sort of certificate mills they attend. Not to mention the Government paying employers to keep unsuitable candidates on payroll for employment numbers as well out of trouble during the day – at least.

          This is also apparent in critical skill areas, including health care et al.

          Would add I would not want to be entering skilled labour at this juncture and hope to hone skills, everything is contra to it. So lucky to be doing the work I am due to clientele being prepared to pay for quality = value.

          Reply
  11. Tom Stone

    We are about to see an explosion in the US homeless population, in an election year, during a Pandemic.
    This is not something that our current system is even remotely able to deal with and the resulting “Civil” unrest will not be dealt with rationally or sensibly.
    When the only tool you have is a hammer…
    The economic and social consequences are, in degree, impossible to predict.

    Reply
  12. skippy

    Interestingly … day trader sorts that were making lots of ideological noise post GFC and cheered on the treatment of Occupy are now drowning in salty tears …

    Cries of who would want to trade in this market and the scourge of money printing …

    Reply

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